Anneliese Dodds: As the Minister has indicated, amendment 20 is to the schedule, which is grouped with clause 14. We have a number of concerns about the proposed changes to social investment tax relief, which is why our amendment asks for a review of their effectiveness and impact.
As colleagues will be aware, social investment tax relief is aimed at supporting social enterprises, comprising those businesses that plough their profits—or at least a proportion of them—back into a social and-or environmental mission. With this relief, where investments by individuals are eligible, they can reduce an individual’s income for income tax purposes by almost a third. It is clearly a significant relief and one that, while having many positive impacts, has been suggested as leading to abuses, with the social or environmental impacts from investment in some anecdotal cases being cosmetic rather than actual.
There are also underlying issues about whether there is a level playing field between social enterprises and the public sector when it comes to the delivery of some  public services, which could be intensified by the development of additional scope or type of tax reliefs when it comes to social enterprises. Indeed, for those reasons, some people have entirely rejected even the principle of social investment tax relief in the first place. I understand Dame Hilary Blume, director of the Charities Advisory Trust, was concerned about the creation of the relief in the first place, saying it would attract those interested in profits rather than social good to the sector.
In my experience as a constituency MP—and others may share this experience—social enterprises that operate in my constituency, such as the charity Aspire Oxford, undertake work that the Government either have never done or which they have abandoned due to a lack of resources, such as the enormous reductions in support provided through probation services. It is important that organisations such as these, which genuinely deliver additionality, are supported. Nonetheless, in that context, we have a variety of concerns about the currently proposed changes and it is for that reason that we ask for a review. I would be grateful—even if our amendment does not pass—if the Minister could provide answers to a number of these concerns, presently or by letter in the future.
The first concern we have is about the process surrounding these measures. As colleagues will know, rather confusingly, not all social enterprises qualify for social enterprise relief. Predominantly, the relief is focused on community interest companies, charities and community benefit societies. For that reason, before receiving investment, many social enterprises ask HMRC for advance assurance—this topic pops up again—that they will qualify for SITR. I am concerned to have learned from the sector that assessors seem to have been taking decisions already about whether social enterprises will qualify for SITR on the basis of the rules we have in front of us today, which have not yet been passed by Parliament, rather than on the basis of the current rules.
I know the rules would have retrospective impacts: in practice they would be for investments dating from April 1. It seems strange, however, for assessors to be taking decisions already on the basis of the new rules and this is potentially a disadvantage for social enterprises that are negatively affected by the new rules.
I have also heard concerns about the new treatment of leasing within the new provisions. As I understand it, the Government conceive of leasing as an inherently low-risk activity and therefore not worthy of subsidy, but it is not clear to me that all the implications of this position have been thought through. An example is that of a specialist facility, such as a rundown heritage swimming pool. In fact, many of us may have those in our constituencies—as we know, many have closed. It is very difficult for local authorities to redevelop those facilities in current financial circumstances. We could imagine an example where a social enterprise might want to take on that pool, purchase it, attract investors into that project, but not run the swimming pool themselves as they do not have the expertise to do so. They might then want to have a leasing arrangement with a specialist leisure provider to deliver the services from that swimming pool. The problem with the new changes is that, in this context, even though the risk of that new approach would be reduced because the specialist provider would have more experience of running swimming pools than  the social enterprise, the latter would be left in an invidious position, because it would lose the tax break if it engaged in that kind of leasing arrangement.

Anneliese Dodds: I am grateful to my hon. Friend for making that point, and I agree that this could apply to a range of different facilities. In many circumstances, this kind of arrangement is the only way to keep those facilities going. We could potentially see them entirely disappear—we all know about the sad disappearance of community pubs in our areas—so I am grateful to her for making that point.
In addition to those potential issues, we are also concerned about the differential treatment of social enterprises by age, with the £1.5 million cap being lifted for social enterprises under seven years old. Will the Minister explain why there is precisely this seven-year limit? It may in practice be that local authorities are relying on well-established, well-run and highly experienced social enterprises to help to provide essential services and facilities in conditions of extreme budget cuts, but it is those older enterprises that are potentially disadvantaged by this scheme. I hope that we are going to learn the exact decision-making process on this seven-year cut-off point. If it is specifically to advantage younger social enterprises, why is that the point? Is it the case that youth is being viewed as a proxy for the ability to take on risky activities? If so, where is the evidence basis for that?
I point again to the example of Aspire in my constituency that operates a range of programmes, including one that supports offenders going into work—people who would not normally be necessarily be taken on by different employers. Surely that is a highly risky activity, but it is one at which they—as an established social enterprise—excel. Age does not necessarily appear to be a good proxy for the ability to take on riskier activities. If this seven-year cut-off is not there to encourage younger social enterprises, then why has it been instituted? We need more information on this.
Finally, we feel that additional evidence on the effectiveness of the anti-avoidance clauses within the new provisions is required. Social enterprises in the voluntary sector have a long history in areas such as hospice care, specialist domestic violence and mental health services where they have often genuinely driven innovation. Other social enterprises, such as those I mentioned earlier, have merely donated some of their profits to charity, rather than having a genuinely social or environmental mission. May we have more clarification on how abuse will be identified and dealt with?

Anneliese Dodds: I thank the Minister, but I am still concerned about why exactly seven years has been chosen as the cut-off. Listening to his helpful remarks, I imagine that we could potentially see some gaming around this, because there is a significant tax advantage from having a younger social enterprise. Would we see social enterprises being created out of previous ones just to qualify for the different tax treatment when actually they would be focused on the same activity? It seems peculiar to me and I do not understand why the seven-year figure has been chosen. My dad was an accountant; he always said to me, “You’ve got to keep your bank statements for seven years”, so I can understand seven years from that perspective. Why is there no gradation? Why seven and not another figure—three, five, 15 or 20 years? Perhaps some clarification can be provided.

Peter Dowd: It is a pleasure to serve under your chairmanship, Mr Walker.
I appreciate that the strictures of Finance Bill procedure commonly give rise to the overwhelming excitement of review amendments, so I ask the Committee to withhold its lack of surprise that amendment 21 would introduce yet another review. The Government’s sensible stated aim in introducing the allowance is to recognise that  many taxpayers no longer fit within a neat and simple model of PAYE-only income or self-assessment-only income. We all recognise that that is the reality, but we should not get too carried away by the idea that online hobby trading is an entirely new activity triggered by the advent of the online sharing economy; I suspect it is more like old wine in new skins. Spending a weekend repairing a few clocks as a hobby and then selling them on eBay for extra income on the side is not an entirely new phenomenon. People 20 years ago did the same through car boot sales, antique fairs or classified ads; this is just a modern version.
Modernising the tax system to recognise the multiple sources of income that taxpayers may now receive is sensible, but we should not always imagine that the problems that we are trying to solve are entirely new, nor should we make too hasty a stab in the dark for solutions. The Association of Taxation Technicians says that, as drafted, the provisions discriminate against individuals who, in addition to having the type of microbusiness to which the trading allowance is intended to apply, also have a sole trader business which cannot benefit from the trading allowance. In that situation, the provisions prevent the microbusiness from qualifying for the trading allowance. The ATT’s concern is that the allowance is potentially discriminatory.
The Government state that the aim of the allowance is to provide
“simplicity and certainty regarding Income Tax obligations on small amounts of income from providing goods, services, property or other assets…and to help the UK become leaders in the digital and sharing economy”,
but it could easily end up creating new complications for taxpayers, or lead inadvertently to perverse incentives. The Chartered Institute of Taxation’s low incomes tax reform group welcomes the aim of the measures, but has said that it is
“very concerned that unrepresented low-earners will struggle to understand some of the more complex rules, especially if they have overlap profits, more than one trade or source of income or have not elected, as often will be the case, to use the cash basis of accounting.”
Its concerns stem especially from the fact that this relief’s intended group of users is less likely to engage professional accountants or other advisers. As a result of the complications involved in having to choose a particular accounting basis or work out the types of income that apply, the allowance may fail to benefit that group of users. It may instead become yet another strand in the complex web of allowances that professional advisers throw into the mix when helping their clients to avoid tax.

Ruth George: Obviously, universal credit is being rolled out. That will be a particular detriment to people on very low incomes who are self-employed, because they will be deemed to earn the minimum wage on 35 hours a week throughout the year: around £13,600.
If their actual income is below that at the moment, they can receive tax credits and are eligible to apply if they have children and a family. Under universal credit, they will not be able to receive such payments, though they may be liable for tax. That is another reason why a review after the roll-out of universal credit would be particularly useful, to see the impact on the self-employed and people with microbusinesses.

Mel Stride: Clauses 18 and 19 and schedule 4 make changes to the rules for corporation tax losses, as we have discussed. They modernise the losses rules by increasing their flexibility, while at the same time ensuring that companies pay tax in years when they earn significant profits. When a company makes a loss, it can carry it forward and use it to offset the tax liability of certain income in future years. Carrying forward losses is an important feature of the tax system and ensures that the tax paid by companies is proportionate with their profits over the long term.
However, these loss relief rules are not reflective of the way businesses operate and are out of step with international practice, which I shall come on to in a moment. First, carried-forward losses can typically only be set against profits from the activities to which they relate, as the hon. Member for Bootle pointed out, rather than the profits of other activities in a company, or the profits of other companies within a group. Secondly, the absence of any restriction on the amount of taxable profit that can be relieved by carry-forward losses means  businesses making substantial UK profits may not pay any corporation tax due to losses incurred on historic activities.
The clauses will have effect from 1 April 2017, in line with the commencement date previously announced by the Government. The changes made by clause 18 will mean that rules will be relaxed for losses arising from 1 April 2017 that are carried forward, such that those losses can be set against the profits of different activities within a company and the taxable profits of its group members. As we have said, the amount of annual profit that can be relieved by carried-forward losses will be restricted to 50% from 1 April 2017, subject to an allowance of £5 million per group.
The hon. Member for Bootle asked specifically about that £5 million figure, and about whether the Treasury has looked at international comparisons and factored that into its thinking on this matter. I assure him that it has. This rate is more generous than the rates in a number of other countries. In Germany, for example, the rate is €1 million. As he pointed out, the main rationale for focusing the restriction above £5 million is to bear down on the top 1% of profitable businesses in the country without going further down the spectrum. We believe that we have achieved the right trade-off between the level of the figure and the number of companies that will potentially be affected by the restriction.
The amount of annual profit that can be relieved by carried-forward losses will be restricted to 50% from 1 April. That restriction will address a public concern by helping to ensure that companies that make substantial profits pay tax. It is worth dwelling on that point for a moment. There is a general feeling among the public that large companies, when they make a lot of profit, should pay to support the public services that we are all in favour of.
The restriction focuses on the largest companies. Due to the £5 million allowance, as the hon. Gentleman recognised, 99% of companies are forecast to be unaffected by the restriction, but all companies will benefit from the more modern and flexible loss-relief regime. The changes in clause 19 will stop companies entering into avoidance schemes to exploit the rules introduced by clause 18. Taken together, the loss-relief reforms will raise more than £1.6 billion over the next five years.
Amendment 22 would require HMRC to undertake a review of the operation of the provisions that introduce group relief for carried-forward losses. The current rules for carried-forward losses do not reflect the way businesses operate in practice and can lead to the unfair outcome of losses being worth more to some companies than to others, depending only on their group structure. The provisions to allow carried-forward losses to be set against the profits of group members are an important step to modernise the regime. The Bill will also introduce robust anti-avoidance provisions, to ensure that the new flexibility does not lead to opportunities for abuse. As with all policies, the Government will monitor the regime closely once it commences to ensure that it operates as intended.
I urge hon. Members to reject amendment 22. A mandated formal review is not an appropriate response to provisions that have been widely consulted upon and  carefully designed. On anti-avoidance, the hon. Gentleman rightly raised certain circumstances that the Bill will deal with. For example, it will ensure that companies do not abuse the buying-in of losses by taking over other corporate bodies, or by using losses from trades that are not carried out by the acquiring company, which can be done using various devices.
The hon. Gentleman asked why there is a carve-out for creative industries under these arrangements. That is because they are subject to special rules when it comes to losses. While a creative project—a film, for example—is ongoing, its losses cannot be surrendered to companies in the same group. That means that the company is not able to use losses in the flexible way that other companies can. Those special rules are an anti-avoidance measure, and including creative losses in the relaxation part of the loss reform would risk opening up avoidance opportunities, which we clearly do not wish to happen.
The hon. Gentleman also asked about banks. He suggested that restricting the use of bank losses to 25% might be too generous. I remind him that banks are already subject to an 8% corporation tax surcharge and a levy on their balance sheets, which is not an approach that we have taken to other sectors of the economy. Further restrictions on losses on top of the specifically designed tax regime to reflect the unique position of banks in the economy would be disproportionate.
I turn to amendment 23, which would require HMRC to undertake a review of the operation of the provisions for carried-forward losses for insurance companies, creative industries and oil activities. It may be helpful if I explain why those sectors are being treated differently.
The provisions relating to insurance companies prevent the reforms from reducing the value of individuals’ life assurance policies. The loss-relief reform is intended to apply to companies, and the unique structure of the life assurance industry means that it is necessary to make these provisions to prevent individuals from being unfairly impacted. As I said, the reforms have not been applied to creative industries because they already face high restrictions on the use of losses for anti-avoidance reasons,  and the oil and gas regime is subject to a bespoke ring-fenced tax regime that prevents taxable profits from oil and gas extraction from being reduced by losses from other activities. It is right to maintain the integrity of that regime by continuing to treat it separately.
These clauses and the schedule introduce new rules that will modernise the UK’s loss relief and will help to ensure that businesses cannot use carried-forward losses to pay no tax in each accounting period in which they make substantial profits. I hope that Opposition Members will not press their amendment, and I commend these measures to the Committee.

FB 01 Mark Coulter, Technical Consultant, Kerr Henderson (Financial Services) Ltd.
FB 02 The Tax Faculty, Institute of Chartered Accountants in England and Wales
FB 03 Association of Taxation Technicians (ATT)
FB 05 Low Incomes Tax Reform Group (clause 7)
FB 06 Low Incomes Tax Reform Group further submission (clause 17 and Schedule 3)
FB 07 Chartered Institute of Taxation (clauses 18 and 19 and schedule 4)
FB 08 Chartered Institute of Taxation further submission (clause 20 and schedule 5)
FB 09 Chartered Institute of Taxation further submission (clauses 27 and 28)
FB 10 Chartered Institute of Taxation further submission (clauses 29 to 33 and schedules 8 to 10)
FB 11 Chartered Institute of Taxation further submission
FB 12 Association of Taxation Technicians (ATT) further submission (new schedule A1, paragraph 12)
FB 13 Association of Taxation Technicians (ATT) further submission (new schedule A1, paragraph 14)
FB 14 Chartered Institute of Taxation further submission (clause 9 – life insurance policies)
FB 15 Chartered Institute of Taxation further submission (clause 16 – calculation of profits of trades and property businesses)
FB 16 Enterprise Tax Consultants